Opportunity Cost: The slope of the BP is negative, revealing the opportunity cost that is unavoidable every time a choice is made. For the economy as a whole, the decision to produce more of one good must involve a decision to produce less of some other good. 2. Consider an economy that produces only food a ND clothing. Its production possibility boundary is shown below. Icon 105 Week 2 a. If the economy is at point A, how many tones of clothing and how many tones of food are being produced? At point B? At point A, 2. tones of clothing and 3 tones of food are being produced per year. At point B, annual production is 2. 5 tones of clothing and 7 tones of food. B. What do we know about the use of resources when the economy is at point A? At point B? At point A the economy is either using its resources inefficiently or it is not using all of its available resources. Point B represents full and efficient use of available resources because they are on the BP. C. If the economy is at point B, what is the opportunity cost of producing one more tone of food?
What is the opportunity cost of producing one more tone of clothing? At point B, the opportunity cost of producing one more tone of food (and increase from 7 to 8) is the 2. 5 tones of clothing that must be given up. The opportunity cost of producing one more tone of clothing (from 2. 5 to 3. 5) appears, from the graph, to be approximately 0. 75 tones of food. D. What do we know about the use of resources at point D? How would it be possible for the economy to produce at point D? Point D is unattainable given the economy’s current technology and resources.
Point D can become attainable with a sufficient improvement in technology or increase in available resources. 2 summer 2013 3. Consider your decision whether to go skiing for the weekend. Suppose transport rotation, lift tickets, and accommodation for the weekend cost $300. Suppose also that restaurant food for the weekend will cost $75. Finally suppose you eave a weekend job that you will have to miss if you go skiing, which pays you $120 for the weekend that you work. What is the opportunity cost of going skin g?
Do you need any other information before computing the opportunity costs? In general, the opportunity cost for any activity includes three things: 0 the direct cost of the activity, plus whatever you give up in order to do the activity, minus C] whatever “savings” the activity generates In this case, the direct cost of transportation, lift tickets and accommodation of $300 is definitely included. The income of $120 that you give up also counts. Finally, we must deal with the restaurant meals of $75. o that opportunity costs of skiing would be giving up $495 that could be used for other goods and services you want the most. Surely you would have eaten some food even if you hadn’t gone skiing, so the full $75 is not included. But given the relatively high price of restaurant meals compared to buying your own groceries, you will probably include most of the $75. Thus the opportunity cost of the ski trip is $420 plus some (large) fraction of the $75. 4. What is the difference between scarcity and poverty? If everyone in the world had enough to at, could we say that food was no longer scarce?
Discuss your ideas with class By scarcity we mean simply an excess of wants over the resources available to satisfy those wants. Poverty is concerned with a level of resources below some threshold of sufficiency. One can conceivably eliminate poverty, but that would not eliminate scarcity. Even if everyone had enough to eat, there would be demand for more food than the minimum required for survival if it were available at a price of zero. Therefore food would still be scarce. Even if goods became free, there would be a scarcity of time available to consume and enjoy them.